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Facts
The assessee challenged the disallowance of guarantee commission paid to the Government of Karnataka for loans obtained from HUDCO. The initial appeals were dismissed for delay, but the High Court condoned the delay and directed the Tribunal to decide on merits. The issue pertains to the disallowance of guarantee commission for AY 2013-14 and 2014-15.
Held
The Tribunal admitted additional evidence filed by the assessee and decided to send the issue back to the Assessing Officer for fresh consideration. The Tribunal noted that the assessee is a no-profit-no-loss organization and the government provided grants to cover the guarantee commission. The assessee was given the liberty to file further documents, and a reasonable opportunity for a hearing was to be provided.
Key Issues
Whether the guarantee commission paid to the Government of Karnataka for loans availed from HUDCO is an allowable expenditure for the assessee, considering the nature of the agreement and the government's provision of funds.
Sections Cited
Sec.5 of The Karnataka Ceiling on Government Guarantees Act, 1999, Sec.43B of IT Act 1961
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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI KESHAV DUBEY
Date of hearing : 20.06.2024 Date of Pronouncement : 28.08.2024 O R D E R Per Laxmi Prasad Sahu, Accountant Member These appeals are in second round of proceedings before us. In the first round these appeals were dismissed in limine by the Tribunal by order dated 09.03.2021 for non-condonation of delay in filing the appeals before the Tribunal. The assessee filed appeals before the Hon’ble High Court in of 2022 dated 06.06.2022. The Hon’ble High Court has condoned the delay in both the appeals with a direction to decide the appeals on merits.
2. Since in both the appeals similar issue is involved challenging the disallowance of guarantee commission paid to Govt. of Karnataka on the loan taken from HUDCO and other FIs, these appeals are heard together. The grounds of the appeals in both the appeals are as follows:
• The Assessing authority has erred in Disallowing the expenditure of Rs.3,09,62,215 for the A.Y. 20123-14 and of Rs.3,15,00,000/- for the A.Y. 2014-15 being the financial guarantee commission payable to govt of Karnataka for issuing guarantee for various loans availed from Karnataka housing development cooperation for the appellant's housing schemes for the benefit of economically weaker sections of society (SC/ST category) in rural areas as per the housing schemes formulated by govt of India and Karnataka. • The Appellate authority, commissioner of income tax (Appeals)-5 is incorrect in sustaining the disallowance of guarantee commission in the appellate order dt. l 7/08/2017 • The assessing authority has mis lead himself in disallowing the guarantee commission expenses on the surmise that government has not provided any guarantee during the year ignoring the facts and details submitted by the appellant with regard to guarantees issued in the year 2005 which is continuing guarantee as per para 2 of guarantee agreement dt.24th march 2005 for all the loans raised by the appellant for implementation of the housing schemes. • The assessing authority is incorrect in holding that the guarantee commission paid/payable in respect of various grants and loans dispersed to beneficiaries is in contrary to the fact that loans are availed by the appellant from HUDCO under the guarantee of Govt of Karnataka with liability to Pay 1% commission for such liability. • The assessing authority is incorrect in holding that the govt has not provided guarantee to HUDCO on behalf of the appellant co. during the year not considering the guarantee issued in the earlier years with continuing guarantee with liability to pay the guarantee commission annually. • The assessing officer failed to take into consideration the payment of guarantee commission to the govt of Karnataka by the appellant for each of the years commencing from the year 2008-09 to 2012-13. • The assessing officer has failed to consider the evidence produced by the appellant for payment of such guarantee commissions depending on its ability to pay towards the accrued liability. For these and other grounds that may be urged at the time of hearing of appeal, the appellant prays that the appeal be allowed in the interest of equity and justice. The appellant craves for leave, to add, delete or amend the grounds of appeal at the time of hearing.”
3. The issue in these appeals is with regard to disallowance of guarantee commission paid to Government of Karnataka by assessee at Rs.3,09,62,215 in A.Y. 2013-14 & Rs.3,15,00,000/- in the A.Y. 2014- 15 on the reason that there is no nexus between the guarantee commission paid and the 1% commission paid by the Government for meeting the day to day administrative activities. In the year under consideration, the assessee has to pay commission to Government of Karnataka @ 1% from the loan availed from HUDCO from 2000-01 to 2013-14. Further, Sec.5 of the Karnataka Ceiling on Govt. Guarantee Act, 1999 provides that the Govt. shall charge a minimum of 1% as Guarantee Commission which shall not be waived under any circumstances. The Assessing Officer has given a finding that the GOK (Government of Karnataka) has neither allotted funds for the expenses towards the guarantee commission payable to the Govt. not provided guarantee towards the loan taken from HUDCO during the year. The State Govt. has not provided guarantee to HUDCO on behalf of the appellant during the year under consideration. Hence, there is no question of making a provision for payment of a non-existent guarantee commission to the GOK. Even if the GOK. was to give guarantee later, the guarantee commission cannot be treated as expense in the hands of the appellant when it is not recognizing the income from the projects for which loans have been taken from HUDCO/FIs. The grant so received is recognized in the P&L a/c. Grants received towards the various housing schemes are not reflected in the P&L a/c. The utilization of these funds is also not reflected in the P&L a/c. In order to meet the funding requirement of these housing schemes, loans are taken from HUDCO and other FIs which are repaid by the Govt. itself. The loans disbursed to the beneficiaries of the various schemes are recovered by the local implementing officers and the same is being directly credited to the Govt. Treasury. Hence, the guarantee commission paid or payable is related to the various grants and loans disbursed to beneficiaries of the schemes which have been kept outside the purview of the P&L account. There is therefore no question of recognizing guarantee commission as a P&L item and allowed. There is no nexus between the guarantee commission paid and the 1% commission paid by the GOK. for meeting its day to day administrative activities. In view of the same, CIT(A) did not find any infirmity in the impugned addition made by the Assessing Officer, therefore, the appeal on this ground was not allowed by the Ld. CIT(A). Aggrieved, the assessee is in appeal before the ITAT.
4. The ld. AR has filed written submissions which is as under:-
“1. The Assessing authority has erred in Disallowing the expenditure of Rs. 3,09,62,215/- towards the financial guarantee commission payable to Govt. of Karnataka for issuing guarantee for various loans availed from HUDCO for the appellant's housing schemes for the benefit of economically weaker sections of society (SC/ST category) in rural areas as per the housing schemes formulated by Govt. of India and Karnataka.
The assessing authority has mis lead himself in disallowing the guarantee commission expenses on the surmise that government has not provided any guarantee during the year ignoring the facts and details submitted by the appellant with regard to guarantees issued in the year 2005 which is continuing guarantee as per para 2 of guarantee agreement dt.24th March 2005 for all the loans raised by the appellant for implementation of the housing schemes.
The assessing authority is incorrect in holding that the guarantee commission paid/payable in respect of various grants and loans dispersed to beneficiaries is in contrary to the fact that loans are availed by the appellant from HUDCO under the guarantee of Govt. of Karnataka with liability to Pay 1% commission for balance amount of loan outstanding each year.
The assessing authority is incorrect in holding that the govt. has not provided guarantee to HUDCO on behalf of the appellant, during the year, not considering the guarantee issued in the earlier years which is continuing guarantee till the repayment of entire loan with interest with liability to pay the guarantee commission annually on the balance of loan and interest amount 5. The assessing authority is incorrect in noting that the loans availed from HUDCO and other financial institutions are repaid by the Govt. itself. Such loans availed are disclosed as liability in the balance sheet of the appellant and in no circumstance is repaid by the Govt.
6. The assessing authority failed to understand the working of the appellant company with regard to availment of loan from HUDCO and other financial institution and the repayment along with interest. The assessing authority has failed to read and understand note 20 of the notes forming part of accounts which reads as under: "The loan drawn from the HUDCO, Financial institution are generally .secured by the sovereign guarantee of Govt. of Karnataka with budgetary provision for repayment of principal and interest except for loan from GOK and Indian Bank" which means the commission for issue of sovereign guarantee by GOK to HUDCO and any other leading institution is the liability of the appellant and therefore is an allowable expense. The interest payable on HUDCO/ Bank loan is only received from GOK from its budgetary allocation, which is accounted as grants received and on payment of HUDCO/ Bank the same is adjusted out of grants received towards interest.”
7. The assessing authority has misread and misunderstood portion of note no. 18 forming part of the accounts which reads as under: The day to day administration expense of the company like salaries, printing & stationary etc., are provided by Govt. through budgetary provision the company has treated the interest earned on programme as part of the program fund. However the Assessing officer has wrongly quoted in page 6 para 4 of the order that the funding requirement of housing scheme loans taken from HUDCO and other financial institutions are repaid by govt. itself which is contrary to the fact that such loans are repaid out of the recoveries from the beneficiary of the scheme and therefore the loan repayment is the liability of the appellant only.
8. The assessing authority failed to take into consideration the payment of guarantee commission to the govt. of Karnataka by the appellant for each of the years commencing from the FY 2008-09 to 2013-14. The appellant has paid a sum of Rs. 60.26 Cr. commencing from FY 2008-09 to FY 2013-14 towards total liability of Rs. 60.76 Cr. With balance of Rs. 30 Lakhs still payable.
9. The assessing officer and the appellate authority has failed to consider the evidence produced by the appellant for payment of such guarantee commissions depending on its financial ability to discharge the accrued liability.
10. The AO has disallowed the expenditure towards Guarantee Commission of Rs. 3,09,62,215/-ignoring the contractual obligation between the Company and the Government of Karnataka for availing loan from HUDCO.
The Guarantee commission payable to the Government of Karnataka is based on the terms of the Guarantee agreement between the appellant and the GOK. The Guarantee agreement is a commercial contract between the appellant and the GOK and the fact that one of the parties to the agreement is a Govt. is only incidental.
12. In the appellant's case too, the Guarantee commission is a consideration payable to GOK which is not in the nature of a tax, duty, fee or cess for disallowance u/s 43B of IT Act 1961.
The AO has failed to understand the liability of the appellant to pay the Guarantee Commission to Government of Karnataka at the rate of 1% for the loan availed from HUDCO for the years from 2000-01 to 2013-14 as per the agreement between appellant, Government of Karnataka and HUDCO.
Section 5 of The Karnataka Ceiling on Government Guarantees Act, 1999, provides that the Government shall charge a minimum of one percent as guarantee commission which shall not be waived under any circumstance.
The AO has erred in disallowing Guarantee Commission of Rs.3,09,62,215/- alleging that the government has not provided guarantee to HUDCO on behalf of the appellant during the year. The AO has failed to observe and understand that the guarantee is given by Government of Karnataka in year 2005 for all the loans availed and which will continue till repayment of loan with interest for which Guarantee Commission is payable from the year 2000-01 to 2015-16 at the rate of 1% of the loan outstanding.
The assessing authority is totally wrong in holding that the appellant is not earning any income from the project and thus the guarantee commission is not allowable, which is contrary to the activities and financials submitted by the appellant.
As verifiable from the audited financial statements for the year the appellant has admitted total revenue of Rs. 9,80,95,245/- under various heads that includes revenue from operations and other income. The revenue from operation incudes Revenue from Operations Amount (Rs.) Income from projects 84,62,634 Increase/ (Decrease) in work in progress 4,87,70,113 Grants received from GOK towards establishment expenses 3,50,00,000 Income received from Koushalya shaale 28,32,775 Total 9,50,65,552
The other income includes the following Other Income Amount (Rs.) Rent received 25,61,208 1,23,501 Misc. Income Profit/(Loss) on sale of asset 2,80,668 Interest earned on the deposits from Bank 64,346 Total 30,29,723
The issue of guarantee commission is covered matter in the appeals & 1473/Bang/2014 and ITA. 204/Bang/2016 preferred by the department for the Asst. years 2009-10, 2010-11 and 2012-13 respectively. With the above submission of facts and evidences the appellant prays the Hon'ble bench to allow the appeal in total in the interest of equity and justice.”
During the course of hearing, the ld. AR reiterated the submissions made before the lower authorities and also referred to documents which are placed in paperbook containing pages 1 to 96. Further the ld. AR has also filed additional evidence in terms of Rule 10 & 29 of the ITAT Rules, 1963 which is placed at PB containing pages 1 to 106 and annual reports for the FYs 2015-16 & 2016-17 and submitted as under:-
“ 2. The appellant is placing before this Hon'ble Tribunal the various documentary evidences for the above in the accompanying Common Paper Book-II for AY 2013-14 and AY 2014-15.
3. The additional evidence at SI.No.1 is the Guarantee Agreement dated 10.03.2005 between the Government of Karnataka and the Appellant.
4. The additional evidence at SI.No.2 is the Guarantee Agreement dated 30.01.2014 between the Government of Karnataka and the Appellant.
5. The additional evidence at SI.No.3 is the Government Order dated 17.09.2002 which states that the guarantee commission is payable on the actual balance of the Principal and Interest outstanding at the end of each month.
The additional evidence at SI.No.4 is the Proceedings of Government of Karnataka and Government Order dated 04.02.2016 (in Kannada) along with free English translation which provides for book adjustment of guarantee commission payable by the appellant to the Government of Karnataka in the FY 2015-16.
7. The additional evidence at SI.No.5 is the Proceedings of Government of Karnataka and Government Order dated 05.12.2016 (in Kannada) along with free English translation which provides for book adjustment of guarantee commission payable by the appellant to the Government of Karnataka in the FY 2016-17.
8. The additional evidence at SI.No.6 is the return of Income for AY 2016-17 which reflects the Grant towards guarantee commission received in terms of book adjustment pursuant to the Government order as above has been offered to tax in the said year.
9. The additional evidence at SI.No.7 is the return of Income for AY 2017-18 which reflects the Grant towards guarantee commission received in terms of book adjustment pursuant to the Government order as above has been offered to tax in the said year.
10. The additional evidence at SI.No.8 is the Annual Report and Audit Report for FY 2015-16 which reflects the Grant towards guarantee 7,-c-rmission received in terms of book adjustment pursuant to the P4emment order as above.
11. The additional evidence at SI.No.9 is the Annual Report and Audit Report for FY 2016-17 which reflects the Grant towards guarantee commission received in terms of book adjustment pursuant to the Government order as above.
The additional evidences at SI. Nos. 1 to 9 are essentially documents in the nature of agreements with government, government orders, annual report, audit report, return of income of the appellant for subsequent years which support the ground of the appellant.”
6. The ld. AR submitted that the reason for not filing the above- mentioned additional evidences before the authorities below was that they were not specifically called for and accordingly the appellant did not have the occasion to place the same before the said authorities. However, in order to demonstrate the factual aspects of the issues involved, the appellant has been advised to rely upon these documents in support of its grounds of appeal and hence it is now incumbent upon the appellant to bring these documents as additional evidences. These documents are very much relevant to decide the issue. Therefore it was prayed that the additional evidence may be admitted for advancement of substantial cause of justice.
The ld. DR relied on the order of lower authorities and strongly submitted that during the course of proceedings before both the authorities below, the assessee had sufficient time to produce these documents. He further submitted that during the impugned years the GOK has neither allotted funds for the expenses towards guarantee commission payable nor provided guarantee towards loan payment from HUDCO, hence there is no question of making provision for non- existent guarantee commission to GOK. Even if the GOK was to give guarantee letter, the guarantee commission cannot be treated as expenses in the hands of the appellant when it has not recognized income from projects for which the loans have been taken from HUDCO. The guarantee commission paid/payable is related to various grants and loans disbursed to beneficiaries of the schemes which have been kept outside the purview of the profit & loss account. Therefore he submitted that the order of the lower authorities should be upheld.
Considering the rival submissions, we note that the ld. CIT(Appeals) has not accepted the plea of the assessee and he held that there is no nexus between the guarantee commission paid and the 1% commission paid by GOK for meeting its administrative activities. We note that the ld. AR has filed additional evidence in terms of Rule 10 & 29 of the ITAT Rules, 1963 which contains page 1 to 106 and annual reports for FYs 2015-16 & 2016-17. The assessee has submitted the reasons for filing the aforesaid documents before the lower authorities. We note from additional evidence at page 12 regarding book adjustment order for grants provided in budget under payment of Government Guarantee Commission for the Financial year 2015-16 in which it is stated as under:-
“PREAMBLE:- For implementation of Ashraya Housing Schemes, Rajiv Gandhi Rural housing Corporation Limited has taken loan from HUDCO/FI's on based Guarantee. The guarantee Commission payable on Government Guarantee to Government is 1% p.a. as such from the ear 2000-01 to 2013-14 the total guarantee commission payable was Rs.42.76crores. However, the RGRHCL is a no profit no loss institution, the government is providing grants for administrative expenses to the corporation, since, there is no source of income for paying the government guarantee commission in the company, in the background of proposal being submitted either to pay the same or to waive off the guarantee commission, the Government in the year 2015-16 budget under the Head of Account 2216-03-101-2-05-059 (subsidy/ compensation) Rs.27.11 crores is provided to pay the government guarantee commission. The Managing Director of the Rajiv Gandhi Rural Housing Corporation in the above referred (3) has said that, if this grant is released to the company, this will be repaid to the government or if the book adjustment order is issued by finance department, accordingly the be made in the books of the company. Further, the finance department has provided during the year 2015-16 budget (II) Rs.13.15 crores accorded approval for release of grants in addition to the 2015-16 main budget allocation of Rs.27.11 crores.”
From the above it is clear that assessee is a no profit no loss organisation and it has no source of income for payment of commission to the Government. Accordingly, the Government in the year 2015-16 budget under the Head of Account 2216-03-101-2-05- 059 (subsidy/compensation) a sum of Rs.27.11 crores is provided to pay the government guarantee commission. The additional evidence filed by the assessee are very much relevant to decide the case and accordingly we admit the same. We deem it fit and proper to send back the issue to the AO for fresh consideration and decision as per law in the light of additional evidence. The assessee is also given the liberty to file further documents if required. Needless to say that reasonable opportunity of being heard be given to the assessee. The assessee is directed to cooperate with the proceedings for early disposal of the case and avoid to seek unnecessary adjournments.
In the result, both the appeals of the assessee are allowed for statistical purposes.
Pronounced in the open court on this 28th day of August, 2024.